TNAG-0543-FCO40-638-Strength-of-garrison-in-Hong-Kong-1975 — Page 27

CONFIDENTIAL

THE HONG KONG ECONOMY

1.

The 1960s were a period of outstanding success for the Hong Kong economy. GDP grew by 9% a year and GDP per head by over 6% a year on average. Despite a one-third increase in the working population full employment was sustained. The rate of inflation was low and balance of payments difficulties were avoided with visible

trade deficits more than offset by capital inflows and invisibles.

Furthermore, taxation remained low and substantial fiscal reserves

were amassed by the Government.

2.

Since 1970, however, the economy has suffered a series of setbacks. These stem largely from Hong Kong's dependence on trade

with the rest of the world, which makes the economy particularly

vulnerable to the international trade disturbances of the 1970s,

culminating in the current recession.

3. The economy was hit, first of all, by a check to world trade in 1970/71. This resulted in a dramatic drop in the rate of increase of

exports in 1971 with a consequent fall in GDP growth.

4.

Although growth recovered well in 1972 and 1973, exports remained sluggish because that loss of competitiveness in major export markets following unfavourable exchange rate changes. In addition, a severe liquidity squeeze following the collapse of a speculative boom in the stockmarket together with a high rate of inflation and a loss of foreign exchange reserves all contributed to a loss of the economy's

buoyancy even before the effects of the October 1973 oil crisis were

felt. The latter produced a major deterioration in the situation.

The volume of exports fell in 1974 by 7%. As a result there was no

increase in GDP in 1974 and none is anticipated in 1975, and

unemployment has increased substantially.

5.

These economic difficulties have been accompanied by increasing pressure on the Hong Kong budget. A rapid acceleration of

expenditure on housing education and social services since 1971 has raised Government expenditure as a proportion of GDP from 15% in the ten years to 1973-74 to over 20% in 1975-76. In 1974-75 a budget deficit emerged equal to 1% of GDP and despite postponement of

expenditure plans and tax increases a similar deficit is expected for 1975-76. It is however anticipated that the deficit can be financed

without strain by open market and external borrowing.

CONFIDENTIAL

16.